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Norseman Gold: digging deep to turn production into profit

04 November 2009

Barry Cahill has watched his company’s share price rocket during the last 12 months but insists that he is taking noting for granted. The affable chief executive of AIM listed mining group Norseman Gold plc is delivering on his production projections but remains wary of promising too much too soon.

But while the cautious approach is a breath of fresh air for market watchers who tend to tire quickly of CEOs that over promise and under deliver, few doubt the quality of the resource that Norseman Gold has at its disposal – or Cahill’s ability to make it pay.

Norseman mine is Australia’s longest continually running gold operation, having produced in excess of 5.5 million ounces of gold since 1937. Previous owners have included Western Mining Corporation, which sold it before being taken over by BHP Billiton, and more recently Croesus Mining, which ultimately collapsed under the weight of an over-committed hedge book.

Cahill was running the mine for administrators when it was taken over by newly-listed Davos Resources in February 2007 and he remained in place after the acquisition to oversee a return to former glories. It has taken two years of work to re-equip the mine, during which time it has been hit by high costs and heavy pre-tax losses, but things are now starting to come good.

In September the company posted a maiden pre-tax profit of A$20.3m (£11.6m) and investors are showing their appreciation – the share price has risen from 1.6p last October to 51p this week.

“The mine has always been used as a cash cow and when we got hold of it we took a mining perspective on it,” Cahill said. “It is an ore body that needs capital development and drilling. If you keep doing that it will sit there year in year out making good money and be a good baseline for a company to go and build a business.

“We set ourselves a number of tasks in our strategy and the first was to stabilise the production profile, to get the ounces reasonably level and by doing that make a profit,” he said. “Last year we produced 80,000 ounces, up from 77,000 ounces the year before, and we made a A$20.3m profit.”

Despite the successful turnaround, Cahill’s current bugbear is the fact that with two mines operating on the project, Norseman Gold’s treatment plant is only running at 60% capacity. In turn, the ‘nuggety gold’ that comes from the mines means that getting any kind of reasonable production consistency in tricky. “You can get a lot of ounces,” he said. “In the June quarter we hit 22,000 ounces on a target of 18-19,000 ounces and then in the September quarter is was down to 16,000 ounces because we were back in to lower grade again.”

The issue of production is one that initially caused problems at Norseman Gold, with early plans to produce 8,500 ounces per month quickly proving to be a tough challenge. A decision to reduce the target to 6,500 ounces and make cutbacks across the operation turned out to be a smart move, with profitability soaring at the same time as easing diesel costs and rising gold prices.

“We still talk about cost savings and efficiencies every week and that is what gold mining is about,” Cahill said. “You can’t affect the gold price so if the price drops and your costs are not under control you’re gone.”

Expansion plans

In order to reduce the production and cost risks even further and fill up the treatment plant, Cahill’s plan for Norseman Gold in phase two of its development has been to open a third mine, followed by a fourth and fifth mine as soon as possible.

“Two years ago that was a strategy,” he said. “We had the resources, we had the drill rigs and we drilled the holes and two weeks ago we said that OK Decline, our third mine, is a reality. We’ve got a pre-feasibility study and we’ve got real ounces there. People are seeing that step by step we are doing what we said we would do.”

At the higher end of the range Norseman Gold is already producing around 75-80,000 ounces of gold every year and OK Decline is expected to add another 20,000 ounces to that figure in the year to June 2011. Another, larger, resource at North Royal should add 40,000 ounces to the profile over the next fifteen months and ensure the company’s treatment plant is full by next summer – turning the company into a 140,000 ounce producer.

“It has taken us two years to do the work and then it all comes in a rush but I am now much more confident and bullish about where we are going,” Cahill said.

“The mine will generate a fantastic cashflow at 140,000 ounces and that cash will allow us to grow Norseman organically. “We still haven’t looked at all the exploration potential; we’ve got 1,600 sq km and at the moment the mines we are looking at are within 10km of the mills.”

But while Cahill’s current plans are focused on bolstering the company’s resources and spreading its production life, he also has an eye on where the company will move next. “We have come down a long, hard road and fundamentally we have got a good ore body,” he said. “But you can’t just have Norseman in a company, you have got to have Norseman 2 and Norseman 3. So Norseman Gold in the long term has got to become a 200-300,000 ounce producer by getting two or three operations elsewhere.”

Cahill says the company will also want to pay a dividend at some point and believes that its strong cashflow will allow it to fulfil both the current organic and future growth strategies as well as make a return to shareholders. A decision on precisely how the company will deal with these plans is expected to be taken by next summer.

In terms of acquisitions, Cahill is cool on potential purchases despite admitting that a number of mines in its region of Australia are of interest. “There are a lot of people talking about mergers and consolidation in the sector and I don’t want to make a quick decision that turns out to be a poison pill,” he said. “We’ll be cautions – Norseman is a good asset and we have got lots to do over the next 12 months.”

Ben Hobson, SmallCapNews.co.uk